It might appear we can restore UK competitiveness and rebalance our economy simply by depreciating the £UK exchange-rate with our trading partners: And some would argue this is the policy which China is pursuing in its recent depreciation against the US$. However, the UK exchange rate “floats” against other national currencies. Therefore market forces will ensure the UK is always in balance with the rest of the world.

A Capital Problem
Despite our floating exchange rate, it is clear the UK labours under a balance of trade deficit, other things equal, this should cause the exchange rate to depreciate, however, the difference between exports and imports is made up in the capital account. Although the supply of, and demand for, foreign exchange are about even, because of capital flows, the UK does not earn all of the foreign exchange which we attract.

Investment for imbalances
Along the same lines, we might also highlight the perverse effects of foreign investment in the UK. For example, if China invests hundreds of millions in: Manchester Airport, and/or HS2 and/or nuclear power, this inflow of foreign exchange will cause the exchange rate to appreciate, once again disadvantaging our exports. In practice, Britons invest in other nations as well, of course, partly cancelling this effect. However, we are neither investing enough at home or abroad to offset all these capital inflows.

We should bear in mind, Britain might be better off overall as a result of this investment; it cannot be denied that foreign ownership has saved the UK’s car industry, for example. Better, however, if we learned as a nation to invest in and run our own businesses. If it is possible for foreign governments to make money out of investing in the UK, why is it not possible for our own government to do so?

One government which apparently had wit and imagination was that of the Norwegians, who used their oil revenues to establish a sovereign wealth fund. By investing overseas, the Norwegians prevented excess appreciation of their currency. According to some estimates, the UK could have accumulated between £400Bn and US$1Tn (£650Bn) if we had likewise invested our petro-currency windfall. As it is, hundreds of billions of £s of UK exports have been priced out of world markets.